With the selection of Paul Ryan as the Republican vice-presidential candidate, it is clear both political parties agree that the central issue in the presidential election will be the scale and scope of government involvement in the US economy. There will be disagreement over what constituted “normal” levels of spending in the past and indeed over what constitutes “spending”. But there is a widespread view in both parties that it is feasible and desirable that in the future the federal government will be no larger as a share of the overall economy than it has been historically.
Unfortunately, this aspiration is unlikely to be achieved. Even preserving the amount of government functions the US had before the financial crisis will require substantial increases in the share of the economy devoted to the public sector. This is the case for several structural reasons.
First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare and Medicaid and other smaller programmes, about 32 per cent of the US federal budget, or about 7.7 per cent of gross domestic product, is devoted to supporting those aged over 65. The ratio of this age group to those of working age will increase from 1:4.6 to 1:2.7 over the next generation, implying a rise in federal spending of 5.6 percentage points of GDP, if no other adjustments are made. True, as Americans’ health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. However, it will be unlikely to counteract the expected 34 per cent increase over the next generation in the share of the population who will be within 15 years of estimated life expectancy.